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More on the Mortgage Settlement Docs: The Vague Release, the “Work Plan” to Be Named Later

I feel like I’ve covered many of the elements of the foreclosure fraud settlement documents.  See, e.g., here, here, here and here. But others have picked up the mantle and revealed more truths. I did think the release part of the document, which releases everything in the world and then goes back and names exemptions, was a little screwy. It seems like there would be less ambiguity if you named the specific things released instead. And Yves Smith not only backs me up on that, she adds that, because the exemptions are phrased so vaguely, anything state or federal regulators manage to sue over in court could get challenged:

This formula, “we release everything except certain particulars” is not such a hot structure to begin with when you haven’t done investigations, as in there may be conduct you didn’t discover that surfaces later and it isn’t in your Paragraph (11) list that you are still free to pursue. But even worse, the Paragraph (11) list is poorly drafted. Many of its subsections invoke “Covered Servicing Conduct,” “Covered Origination Conduct,” and “Covered Bankruptcy Conduct” in describing what is not released. The problem is that while those terms are DISCUSSED at length at the top of the Exhibit, they are not clearly defined […]

This comes close to Schrodinger’s cat having been given a new half life in the most important legal deal in US history. The “covered conduct” is “certain claims,” or per Black’s Law Dictionary, “a demand of some matter as of right made by one person upon another, to do or to forbear to do some act or thing as a matter of duty.” But the claims aren’t nailed down. And that makes them open to challenge. And this isn’t my reading. I asked a law professor who has written journal articles on matters related to the settlement, and he criticized the release, in particular, the definitions. He said that if a regulator or prosecutor tried going after any of the misdeeds in Paragraph (11) whose description included one of the types of Covered Conduct, he’d give the bank 50/50 odds of winning the argument that the activity in question was not part of the Covered Conduct. Yet another “get out of jail free” card, with the only open question whether this was Administration design or incompetence.

The other part that Abigail Field digs out is that the banks and the enforcement monitor still must enter into post-settlement negotiations on a “Work Plan” for how compliance activities will be carried out. This allows defenders of the deal to say that “there will be strong enforcement” without knowing what that enforcement will be. And the banks aren’t exactly pushover negotiators, especially with all the pressure off and the deal inked. This could get dragged out into court, which would resolve Work Plan disputes, and take a period of months if not years, while the clock ticks on the deal, which only stays in place for 3 1/2 years. So the monitor may not see actual metrics for compliance on the servicing standards or the consumer relief aspects for a significant chunk of that time.

Neither of these points played into the New York Times editorial board response to the settlement, but even they had the good sense to know that it represented a near-total victory for the banks:

Compelling the banks to do principal write-downs is an undeniable accomplishment of the settlement. But the amount of relief is still tiny compared with the problem. And the banks also get credit toward their share of the settlement for other actions that should be required, not rewarded.

For instance, they will receive 50 cents in credit for every dollar they write down on second liens that are 90 to 179 days past due, and 10 cents in credit for every dollar they write down on second liens that are 180 days or more overdue. At those stages of delinquency, the write-downs bring no relief to borrowers who have long since defaulted. Rather than subsidizing the banks’ costs to write down hopelessly delinquent loans, regulators should be demanding that banks write them off and take the loss — and bring some much needed transparency to the question of whether the banks properly value their assets […]

When it comes to helping homeowners, banks are treated as if they still need to be protected from drains on their capital. But when it comes to rewarding executives and other bank shareholders, paying out capital is the name of the game. And at a time of economic weakness, using bank capital for investor payouts leaves the banks more exposed to shocks. So homeowners are still bearing the brunt of the mortgage debacle. Taxpayers are still supporting too-big-to-fail banks. And banks are still not being held accountable.

The second lien problem is very real, as are the consumer relief for other actions that banks do in the normal course of business, and the enforcement inadequacies, and the small universe of borrowers eligible for relief, and the vagaries of the release, and the side deal with Ally because they couldn’t pay, and….

I guess the NYT will get kicked off the list for conference calls now, too.

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David Dayen

David Dayen